Economic policymaking in the grip of some really bad ideas

Sometimes bad ideas just take over. In economics and politics, policy ideas notoriously show the effects of what the very comfortable think will benefit them. But sometimes even the cynically self-interested can talk themselves into believing their own hype. And for whatever combination of reasons, something like magical thinking seems to be playing a large part in the formulation of current economic policy, not just in the Obama White House but in Germany, Japan and other major economies, as well.

Economist Brad DeLong joins the laments that Paul Krugman has been shouting in his columns and blog posts about the return of Herbert Hoover economics, even though there is overwhelming empirical evidence that it makes recessions much worse than that would be in comparison to an aggressive policy of fiscal stimulation by the federal government.

I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc were over in the rich world. No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent without doing something major about it.

I was wrong. That is precisely what is happening.

How did we get here? How can the US have a large political movement – the Tea Party – pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote? Why are politicians not terrified of their displeasure?

Economic questions abound, too. ... Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?

It is now clear that the right-wing opponents to the Obama administration’s policies are not objecting to the use of fiscal measures to stabilize nominal spending. They are, instead, objecting to the very idea that government should try to serve a stabilizing macroeconomic role. [my emphasis]

David Dowd in an essay on the economists Thorstein Veblen (1857-1929) and John Kenneth Galbraith (1908-2006) talks about how Adam Smith in his classical economics did not assume that the operations of individual businesses were somehow inherently benign or that individual businesspeople were virtuous as a rule:

Nonetheless, Smith advocated a political economy absent of institutional controls of State or church over businessmen. Instead, and to transform the particular 'private vice' of businessmen into social well-being, Smith famously depended on 'the invisible hand' of market competition. ...

As the eighteenth century ended, such a hope could be seen as realistic; as Veblen was writing The Theory of Business Enterprise [1904] harsher realities had prevailed. Half a century later, when Galbraith wrote American Capitalism [1952], an economist who still believed in the benign rule of market competition as providing economic safeguards had to be bewitched by ideology, not responding to facts. [my emphasis]

(From "The virtues of their defects and the defects of their virtues: Reflections on John Kenneth Galbraith and Thorstein Veblen" in Michael Keaney, ed. Economist with a Public Purpose : Essays in Honour of John Kenneth Galbraith [2000].)

The understanding of economics for many of our policymakers, including leading figures of the Democratic Party including the President, seems to have largely reverted to an earlier age, as DeLong laments in his post. Neoliberal dogma, which is essentially Herbert Hoover economics for the age of "globalization", is prevailing over pragmatic interests. At least over the interests of the majority of the people.